Anti-Competitive and Rent-Shifting Aspects of Domestic-Content Provisions in Regional Trade Blocks / Florencio Lopez-de-Silane, James R. Markusen, Thomas F. Rutherford.

Format:

Book

Author/Creator:

Lopez-de-Silane, Florencio.

Contributor:

National Bureau of Economic Research.

Markusen, James R.

Rutherford, Thomas F.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4512.

NBER working paper series no. w4512

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1993.

Summary:

Regional trade agreements must specify domestic-content rules (rules of origin) that define the conditions under which a good qualifies as 'domestic' and so may be freely traded within the block. The paper analyzes such rules, focussing in particular on oligopolistic industries in which foreign multinationals producing within the block rely much more on imported intermediate inputs than do domestic firms. In such a situation, we argue that domestic content provisions are anti-competitive, reducing overall final output of the industry, and shift rents (in the absence of free entry) to domestic firms. It is possible that the anti-competitive aspect of the rules are sufficiently strong that total industry profits rise and the equilibrium demand for the substitute domestic inputs falls (the scale effect of reduced output outweighs a substitution effect in favor of domestic intermediates). The latter effect is more likely to the extent that the foreign multinationals can switch from producing within the block to exporting to the block. These ideas are then examined numerically using an applied general-equilibrium model of the North American auto industry.

Notes:

Print version record

October 1993.